What Exactly Is Financial Planning?

Daniel Cunningham, CFP® - Associate Director of Wealth Management

Throughout everyday life, the question often comes up: “So what do you do?” Typically, I respond by stating that I am a “financial planner.” I recognize that with no further explanation of what that exactly means, everyone interprets it slightly differently based on their own knowledge and experiences. Financial planner, fiduciary, financial advisor, investment advisor, stockbroker – there are a number of names for people who provide financial advice to individuals. It can be quite tough to dissect and differentiate, especially when they are so commonly confused and commingled. So how is a financial planner different? What exactly do we do?

The short answer is - we do financial planning. 

I admit that probably isn’t much help. So, let’s talk about what financial planning is. There are numerous definitions for financial planning, but my personal favorite comes from the Certified Financial Planner (CFP®) Board:

The Definition

Financial Planning is a collaborative process that helps maximize a Client’s potential for meeting life goals through Financial Advice that integrates relevant elements of the Client’s personal and financial circumstances.

There is a lot of information in there to digest. Let’s break it down a bit further to help bring some more clarity to the idea of financial planning.

Collaborative Process 

First and foremost, financial planning is a process. It is not one meeting. It is not a document handed over to a client. And it is, by necessity, collaborative. You, as the client, have data - both qualitative and quantitative. This includes your current situation and what we are trying to accomplish - your goals. We, as the planner, have knowledge and experience in helping people achieve those life goals, financial or otherwise. Financial planning brings the two parties together and we work as a team to get you as close to achieving those goals as possible.

Maximize a client’s potential for meeting life goals 

Everyone has different goals for their lives. Typically, first and foremost is planning for retirement or education, but some other common goals we see include the following:

• Protecting your loved ones in the case of death or disability
• Starting a family
• Planning to leave a legacy
• Buying a first home
• Buying a vacation home
• Career change
• Caring for elderly parents
• Moving to a different state, or country
• Extended travel
• Starting or buying a business
• Reducing Debt

We start with the goals and work backwards. What needs to be done now in order to achieve those goals in the future?

Relevant Elements of the Client’s Personal and Financial Circumstances

Now that we know where we want to go, it is time to figure out how we get there. Relevant elements of the client’s circumstance include both financial and personal factors. Financial elements include income, expenses, savings, insurance, employer benefits and more. Personal elements, while more loosely defined, are just as important. These include how you think about money, what your risk tolerance is, any health concerns you have, what your family situation is, and much more.

Our job is to arrange, change and align this set of circumstances in a way that gives our client’s the best chance to achieve their goals. For example, if a client is projected to have a shortfall in retirement savings we may produce the following recommendations:

• Increase 401(K) contributions to 6% to take full advantage of employer’s match
• Open a Roth or Traditional IRA and contribute the maximum of $7,000 for this year
• Consider pursuing a slightly less expensive lifestyle in retirement at 70% of your current income, adjusted for inflation
• Reduce current discretionary expenses to $1,000 per month
• Refinance your mortgage and reinvest the savings into a tax-advantaged retirement account

Note: These recommendations are completely hypothetical in nature and should not be taken as financial advice to the reader.

The Process

Now that we understand what financial planning is, let’s dive into what the process looks like. The financial planning process includes seven distinct steps which work in a cyclical nature. That is to say, the process is iterative as goals and situations change.

Source: CFP Board

1. Understanding the Client’s Personal and Financial Circumstances—The process begins by establishing a quantitative and qualitative picture of who the client is and what they want to achieve financially.
2. Identifying and Selecting Goals—Using the information identified in step one, the financial planner helps the client identify and select goals.
3. Analyzing the Client’s Current Course of Action and Potential Alternative Courses of Action—This step establishes whether the client is moving toward their financial goals and if not, identifies alternative recommendations to do so.
4. Developing the Financial Planning Recommendation(s)—At this point, the financial planner evaluates and selects the recommendations they believe will help meet the client’s goals.
5. Presenting the Financial Planning Recommendation(s)—Here the financial planner shares the recommendations and the thought process behind them to help the client make an informed decision about whether the recommendations are a good fit.
6. Implementing the Financial Planning Recommendation(s)—Often the most difficult step, this requires the client to have the desire and discipline to put the plan into action with the support of their financial planner.
7. Monitoring Progress and Updating—Because financial planning is a process and not a single end-point, the plan is continuously monitored and adjusted as the client’s life evolves.

The Impact

If you made it this far, I hope I have provided some clarity on financial planning. In my mind, I wish that every advisor began each engagement with a financial plan. I find it imprudent to provide advice on investments, insurance, or other items without first fully understanding the client and their personal and financial situation. 

When I work with new clients who have never done a full financial plan before, they often are surprised at how involved and complex the planning is. The process does not take one day or one week. It requires effort and time from both the advisor and the clients. However, as we complete the implementation of the first iteration of a plan, I nearly always hear feedback about how much better the clients feel than they did before we started. That, to me, is priceless. 

Are you interested in doing a financial plan for yourself? 

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Cunningham Wealth Management, LLC is a registered investment adviser (RIA) providing customized and fee-based financial planning, investment management, and tax planning services. We act as fiduciaries to our clients, meaning we are bound to always act in their best interest. Furthermore, all of our advisors either hold a CPA or CFP® professional designation. We work hand-in-hand with the professionals at Cunningham & Associates CPA's, Inc. to provide individuals, families, and businesses with a full suite of financial services. 

Cunningham Wealth Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.